ch6 - Managerial Accounting Chapter 6 - Cost Volume Profit...

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Managerial Accounting Chapter 6 - Cost Volume Profit Analysis (CVP)
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Chapter 6 Highlights What happens to CM as a firm experiences a change in activity? How do we compute CM ratios? How does a change in variable costs, volume, fixed costs and selling price affect a firm’s CM? How do we compute Break Even (BE) point? Let’s prepare a CVP graph How can we use CVP to determine level of output & target profit? Margin of Safety what is it? How do we calculate operating leverage & how does it relate to Net Income? Let’s compute the BE point for multi product company How does a change in sales mix affect CM & BE?
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Overview of CVP Analysis CVP Analysis - relationship between selling prices, unit volume, per unit variable costs, total fixed costs & product mix sold CM - amount of sales net of variable expenses towards covering fixed expenses and then profits Per unit CM remains constant if per unit VC and Sales Price are unchanged
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Overview of CVP Example: CM Statement for Nord Corporation a exercise bike manufacturer: Total Per Unit Percent Sales (500 bikes) $250,000 $500 100% Less:Variable Costs 150,000 300 60% Contribution Margin 100,000 200 40% Less Fixed Exp 80,000 Net Income $ 20,000
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CVP Analysis CM can also be looked at using the formula: profit = (sp - vc)u - f sp=sales price vc=variable cost/unit u=units f=fixed costs
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The Contribution Approach If Wind sells 400 units in a month, it will be operating at the break-even point .
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Total Per Unit Sales ( 401 bikes) 200,500 $ 500 $ Less: variable expenses 120,300 300 Contribution margin 80,200 200 $ Less: fixed expenses 80,000 Net income $ WIND BICYCLE CO. Contribution Income Statement For the Month of June The Contribution Approach If Wind sells one additional unit (401 bikes), net income will increase by $200.
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The Contribution Approach The break-even point can be defined either as: The point where total sales revenue equals total expenses (variable and fixed). The point where total contribution margin equals total fixed expenses.
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Contribution Margin Ratio The contribution margin ratio is: For Wind Bicycle Co. the ratio is: Contribution margin Sales CM Ratio = $200 $500 = 40%
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Contribution Margin Ratio At Wind, each $1.00 increase in sales revenue results in a total contribution margin increase of 40¢.
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ch6 - Managerial Accounting Chapter 6 - Cost Volume Profit...

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